1 / 16

Module 11

Module 11. Valuation of Company Securities.

kellsie
Download Presentation

Module 11

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Module 11 Valuation of Company Securities

  2. All valuation models are based on the basic dividend discount model, i.e., the premise that value is the sum of future cash payments to shareholders, discounted by a rate of return that compensates investors for the risk inherent in the equity interest.

  3. For our purposes: • We briefly consider two models: • The DCF, or discounted cash flow model. • The ROPI, or residual operating income model.

  4. Discounted Cash Flow (DCF) • Firm Value = Present value of expected free cash flows to the firm (FCFF) • FCFF = NOPAT – Increase in NOA

  5. DCF Model • The DCF valuation of common stock involves 3 steps: • Forecast and discount free cash flows to the firm (FCFF) for the horizon period. • Forecast and discount FCFF for the post-horizon period, called the terminal period. • Sum the present values of the horizon and terminal periods to yield firm value.

  6. DCF Model • The resulting value is that for the firm as a whole. The value of common equity is then computed by subtracting the value of the firm’s debt (NFO) from the value of the firm. Dividing this amount by the number of shares outstanding yields the estimated per share stock price.

  7. Residual Operating Income (ROPI) Valuation Model • Firm value = NOA + Present Value of ROPI • Residual operating income (ROPI) is computed as follows: • ROPI = NOPAT – (rw Net operating assets) • where • NOPAT is net operating profit after tax • rw is weighted average cost of capital (WACC) • NOA is Net operating assets.

  8. Residual Operating Income (ROPI) Valuation Model • The ROPI model estimates firm value equal to the current book value of net operating assets plus the present value of expected ROPI.

  9. ROPI Model • The computation is similar to that for DCF and involves 3 steps: • Forecast and discount ROPI for the horizon period. • Forecast and discount ROPI for the terminal period. • Sum the present values of the horizon and terminal periods and then add to the current book value of net operating assets (net working capital plus long-term assets) to get firm value. • Like with the DCF model, the value of the equity is then computed as the value of the firm less the value of its debt.

  10. Managerial Insights from the ROPI Model • Actions to increase firm value: • Decrease the NOA required to generate a given level of NOPAT • Increase NOPAT with the same level of NOA investment

  11. Reduction of NOA Reduction of net working capital: Reduction of long-term operating assets:

  12. Increasing NOPAT

  13. DCF and ROPI Models

More Related